Billions in tax deposits uninsured

Thursday

Jul 31, 2008 at 12:01 AMJul 31, 2008 at 9:38 AM

Your bank account is insured up to $100,000, but you still have a lot at stake in the event of a major failure: hundreds of billions of state and local tax dollars in accounts nationwide that are not insured by the Federal Deposit Insurance Corp.

Your bank account is insured up to $100,000, but you still have a lot at stake in the event of a major failure: hundreds of billions of state and local tax dollars in accounts nationwide that are not insured by the Federal Deposit Insurance Corp.

Losses aren't likely, says a state official, but government treasurers are keeping a close eye on the funds.

Franklin County currently has $300 million of taxpayer money in banks; the city of Columbus easily has tens of millions; and local school districts hundreds of millions more, officials said.

By Ohio law, the uninsured portions of these accounts are backed by collateral purchased by the banks. But many might be backed by bonds of agencies that are in trouble themselves, namely government-sponsored mortgage behemoths Fannie Mae and Freddie Mac.

President Bush signed into law yesterday an emergency rescue bill that allows the Treasury Department to use federal money to prop up the teetering giants, which a former Federal Reserve Bank official recently called "insolvent."

After the biggest bank failure in decades, plunging stock prices for financial institutions, descending home values and rising foreclosures, the FDIC has launched a new advertising campaign to reassure bank customers. The message: Don't worry. You're covered up to $100,000.

"Given recent events, we've stepped up our public-education efforts," said spokesman Andrew Gray. He said now is a good time for people to assess their bank accounts, make sure they understand insurance limits and make changes accordingly.

The fact that such a campaign is even needed "kind of makes you wonder what's going on, doesn't it?" said South-Western schools Treasurer Hugh Garside. "If this all goes bad, I think it's going to all go bad for everybody."

No agency tracks how much of government bank accounts are backed or the type of collateral, said Pam Grandon, an attorney who supervises bank examiners for the Ohio Department of Commerce, Division of Financial Institutions.

But the securitization system would work unless two major problems occurred simultaneously: banks fail and their various collateral funds lose significant value, Grandon said.

"It would have to be a moment in time -- a perfect storm coming together," she said. Despite the protections offered by the FDIC and collateral requirements, Jim Phillips moved quickly last week to pull $3 million of school money from Home Savings and Loan after the bank said deteriorating business conditions forced it to drop all public accounts by Aug. 11.

This spooked Phillips, treasurer of the South Range schools near Youngstown.

"The concern was I didn't know what was going on, and it comes down to the hassle factor," Phillips said. "If something were to happen, that's going to be legal expenses to me, because I don't know what to do" to collect on the collateral.

Garside said he is not overly concerned about the safety of his district's accounts, but he recently began planning for how to meet payrolls if one of its banks got into trouble. Like most public agencies, South-Western spreads its money across numerous banks and has other investments it could sell in a crisis, he said.

In 2006, FDIC-insured commercial banks held $289.7 billion in cash for state and local governments nationwide, of which only 24 percent was insured, according to an FDIC report issued this year.

The report noted that collateralized accounts carry risks: The collateral could lose value before it's sold to repay account holders or it could be missing because of bank fraud. To illustrate this point, the FDIC cited the 2002 failure of an Ohio bank, Oakwood Deposit Bank near Toledo, which collapsed in an embezzlement scandal.

"Some municipal depositors discovered that (Oakwood's) collateral securing their deposits was valued at significantly less than agreed, while other depositors found that the bank had pledged the same collateral multiple times," the FDIC report says.

Adding to the complexity, banks can pool collateral backing multiple customers and accounts together, leaving claimants to fight it out in court over who gets what, officials said.

"If the bank would fail, you have to track down the collateral," said Becky Jenkins, treasurer of Olentangy schools.

That's why last year the Olentangy schools started using a program called Certificate of Deposit Account Registry Service, which takes the district's roughly $40 million in bank deposits and spreads it across hundreds of banks nationwide.

Jenkins believes the method is safer than collateralizing the deposits.

"It's all broken up to $100,000 or less, so it's all FDIC insured," she said.